Trump got a nice hongbao. What will he give in return?

Trump got a nice hongbao. What will he give in return?
US First Lady Melania Trump (R) and President Donald Trump (2nd R) pose with Chinese President Xi Jinping (2nd L) and his wife Peng Liyuan (L) upon their arrival to the Mar-a-Lago estate in West Palm Beach, Florida, on April 6, 2017.
PHOTO: AFP

Following China's millennia-old social customs, its large delegation did not come to Florida last week empty handed. They gave President Trump a nice down payment on one of his key policy objectives: In the first two months of this year, China's trade surplus with the US fell 5 per cent from the year earlier - with US exports to China soaring 22.2 per cent while Chinese sales to America were virtually unchanged.

These are official numbers published by the US Department of Commerce. There is nothing "fake" or "alternative" here. These numbers indicate a deliberate turnaround in China's trade policies to help President Trump deliver on his economic agenda. Here is the proof: During the same two months of last year, China's trade surplus with the US was shooting up at an annual rate of 12 per cent, with American exports falling 11 per cent and our imports from China growing 6 per cent.

China's strategists read President Trump correctly. While our European "friends and allies" echoed the US media - and then some -- by throwing opprobrium and ridicule on America's newly elected president, the Chinese experts remained mainly contemplative, respectful - and deeply worried about Mr. Trump's constant invectives-laden assaults on China's trade "rape" and "robbery."

I read a number of times late last year that the Chinese government and academic analysts were taking very seriously President Trump's obsessive fixation on trade, but, mistakenly, I thought that Beijing's concerns about trade were overshadowed by his threats about China's maritime borders, and by his ostentatious bonhomie with Japan's prime minister.

I was reminded of my mistake last week when, in the run-up to Florida summit, China's official sources were again repeating that Beijing will have to give way on US trade. And - on cue - that was exactly what the US numbers, released two days before the summit on April 6-7, were showing.

Payback time

There is no improvisation here. Beijing's elegant offer to conduct trade discussions over the next 100 days simply means that, at the end of that period, we should see a substantial improvement of American trade accounts with China in the first half of this year, based, most probably, on robust US sales to the Celestial.

It was about time we got some payback. China's President Xi Jinping -- who seems to be taking the Florida summit as the year zero of US-China relations - is well aware of that. Since he took the helm in Beijing on March 14, 2013 and the end of last February, China got out of the US $1.43 trillion(S$2 trillion) in trade surpluses, killing jobs and incomes in our import-competing industries and underpinning the rise of America's net foreign debt to $8 trillion.

If you stop and think about the importance of this turnaround in the US -China trade, it would be easier to understand President Trump's bubbling enthusiasm about his "outstanding" relationship with China's president, and his apparently unbounded optimism about the future American ties with a country Washington actively tried to contain and isolate for more than a decade.

President Trump urgently needs (a) faster economic growth; (b) balanced external trade; (c) jobs and incomes for 14.4 million people without stable employment; and (d) meaningful livelihoods for nearly 40 per cent of Americans currently out of the labour market -- a heart-breaking wasting resource.

How can he do all that when his two main policy instruments are virtually out of commission?

The monetary policy is a spent force. Long years of economic mismanagement have brought the US to the point where the lack of investment in our human and physical capital has reduced the country's productive capacities so much that we have accelerating inflation in a slowing economy. That is a deep-rooted structural problem that requires labour and product market reforms - an issue where the Fed, acting alone, is totally powerless.

Is "Chimerica" back?

The fiscal policy is facing an even sharper binding constraint: Currently standing at 5 per cent of GDP, America's consolidated public sector budget deficit is on an apparently unstoppable ascending path this year and next. The public debt at 115.6 per cent of GDP is also projected to hit 120 per cent over the next two years. And with the primary budget deficit of about 1 per cent of GDP we have years ahead of us just to stop and reverse the growth of public debt - if we can bring our budget deficits down, and keep them down, way down, for many years.

What's left then is the foreign trade policy. Indeed, a substantial reduction of our large trade deficits is the only fast and safe way of providing support to American economy in an environment of reasonable price stability. Washington has a potential stimulus of $480 billion to draw on - the sum of Chinese, Japanese and German trade surpluses with America. According to all the criteria of international trade adjustment, these three countries have the obligation to balance their trade accounts with the US

So far, only China seems determined to do that. Our Japanese and German friends and allies, entirely dependent on America's hugely expensive military protection, are showing no particular interest to follow the same path. The trade deficit with Japan in the first two months of this year is roughly unchanged from the year before, but the deficit with Germany continues to grow on weak US sales to that country.

The question now is: What does the change of China's trade policy toward the US mean for the two countries and for the world economy as a whole.

With its excessive and ultimately unsustainable trade surplus, China knew it had to initiate an appropriate adjustment of unbalanced economic relations with its most important trade, political and security counterpart in the world. That process is now under way.

The declining trade deficit will provide an important support to American economy, where the external sector represents nearly one-third of the country's demand and output. In the case of China, the reduction of trade surpluses will hasten the structural transformation of the economy toward an increasing share of household consumption, domestic investments and service sector industries. The reliance on demand components that can be directly controlled by monetary and fiscal policies will strengthen the stability and growth dynamics of the Chinese economy.

The US and China represent a little more than one-third of the world economy. Their more balanced trade relationship will reinforce their economic growth and will make a significant contribution to a more stable global economic and financial system.

Investment thoughts

The news from the US-China summit in Palm Beach, Florida, is unambiguously good for the world economy and financial markets.

Don't be fooled by the lack of detail on specific issues. China has taken the initiative to lead the way toward a more balanced global trading system. At some point, Japan and Germany may also decide to do more for themselves and to live less off the rest of the world.

American and Chinese leaders have set the markers for a more constructive relationship. That is no mean business, when you think that the best American sinologists are still stuck in a binary choice: An unsustainable, hostility-driven muddling through or an open warfare along the lines of a Peloponnesian War between an upstart Athens and Sparta, an established and frightened power.

If you are inclined to blame the former President Barack Obama's casting about with pivots to Asia and China's exclusion from a trans-Pacific trade deal, think of how wise and operational are our sinologists' thoughts for settling the accounts between the nuclear-armed states.

These are still early days, though. Not all questions of US-China trade and investments are solved. And then there are issues of the feuding Koreas, Sino-Japanese hostilities, China's contested maritime borders and their weaponized landfills, Taiwan and broader issues of reconciling the competitive American and Chinese claims in East Asia.

China, however, is making a significant contribution with concessions on trade and a presidential visit to Florida to show how determined it is to establish a good working relationship with America.

The markets' mood music is not bad at all.

Purchase this article for republication.

BRANDINSIDER

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